Zambia’s kwacha weakened for a fourth day, the world’s worst performer after Ukraine’s hryvnia, as dollar supplies in Africa’s second-biggest copper producer dried up and the price of the metal stayed near a 44-month low.
The kwacha retreated 2 percent, heading for its biggest drop since December 2012 and the most among 24 African currencies tracked by Bloomberg, to 6.265 per dollar by 3:43 p.m. in Lusaka, the capital. The kwacha dropped 11.5 percent this year, Africa’s worst-performing currency. Copper for delivery in three months headed for its biggest one-day drop since March 13. Yields on the nation’s dollar-denominated bonds due September 2022 rose to the highest since Feb. 25.
“The currency is caught in a bit of market panic, with importers covering their forward-currency commitments and exporters sitting on the sidelines, waiting for the kwacha to go a bit higher” before repatriating foreign earnings, Nema Ramkhelawan-Bhana, an Africa analyst at Rand Merchant Bank in Johannesburg, said by phone. “We’re seeing a liquidity crunch caused by” factors such as lower copper prices and emerging-market risk aversion, she said.
The Bank of Zambia has used $178 million of its foreign reserves and raised its benchmark lending rate to a record to support the local currency. A weaker kwacha poses risks to inflation in a country that imports items from oil to clothing, while also pushing up external debt repayment costs. Concern that growth is slowing in China has weighed on the price of copper, which accounts for 70 percent of Zambia’s export earnings.
The Zambian central bank’s low level of foreign-exchange reserves meant it’s ability to support the kwacha is weak, Ramkhelawan-Bhana said, making the currency a one-way bet. The currency is undervalued given Zambia’s economic outlook and should recover to below 6 per dollar in coming months, she said.
Infrastructure investments and expansion in mining, including projects developed by Vancouver-based First Quantum Minerals Ltd., are set to boost growth to 6.5 percent of GDP this year, faster than the sub-Saharan African average of 6 percent, according to the International Monetary Fund’s October World Economic Outlook. Agricultural output may climb, allowing corn exports, Vice President Guy Scott said March 7.
Spending reforms by President Michael Sata, whose 2011 election victory ended two decades of rule by a single party, were met by a Fitch Ratings downgrade last year deeper into junk. Sata, 76, has focused on developing roads and railways in the $21 billion economy and sought to harmonize civil-servant salaries that drove the budget deficit to 8.5 percent of gross domestic product last year along with food and fuel subsidies..
Copper, used in plumbing and electrical wiring, for delivery in three months has fallen 12 percent this year, last week touching a 44-month low. Zambia, which mined an estimated 830,000 metric tons in 2013, was surpassed by the Democratic Republic of Congo as the continent’s top copper producer, according to the U.S. Geological Survey.
Yields on Zambia’s $750 million of debt sold in September 2012, which began trading at 5.16 percent, have climbed 305 basis points since then to 8.21 percent. The securities lost 11 percent in the past 12 months, compared with a 17 percent return in African sovereign bonds, according to JPMorgan Chase & Co. indexes.
“Local demand for the dollar, net dollar outflows from emerging markets and negative fundamentals, such as weakening copper prices continue to weigh heavily on the Zambian currency,” Zambia National Commercial Bank Plc analysts, including Virginia Mwalilino, wrote in an e-mailed note today. “The local currency is expected to remain on the back-foot.”